Case Study: Should You Adjust Your Business Model for a Major Customer?

View more from the

“There’s another one!” Cameron Burke’s son said, pointing to a darkened streetlight across the park. “But it’s out too!” Cameron regretted having started this game with his four-year-old. His company, Lumiscape, produced smart, connected streetlights that had been installed in cities throughout the United States, including Cleveland, where they were now, visiting his parents. He and Graham had decided to squeeze in a walk to Forest Hill Park before bedtime, and he’d challenged the boy to count all the lights he could find. But they’d already seen three that weren’t working properly.

Even my hometown can’t get our products right, Cameron thought as he chased Graham over to the playground. He always vowed to stop obsessing about work when he was with his son, but it was a losing battle.

Lumiscape was now six years old. Cameron had founded it with the idea of building an LED streetlight that would use a mobile signal to notify public works departments when the bulb needed to be replaced. He’d been an aide to the mayor of Philadelphia at the time and knew well how much time city workers spent documenting and following up on complaints about broken lights. But Cameron also had a bigger vision: Lumiscape’s products were designed to gather all sorts of data, including humidity, motion, and seismic activity, and, most important, UVA, UVB, and ambient light so that they could save electricity by dimming when appropriate. The innovative system promised to reduce local governments’ energy consumption and maintenance costs and improve their constituent relationships. Headquartered in Philly, Lumiscape now had customers in nearly every U.S. state and a few European countries.

Cameron allowed himself a quick smile as he thought of how well the system worked in some cities. But not here, he thought. And he’d seen and heard about similar cases of misuse elsewhere. Some localities had bought lights but failed to fully utilize the accompanying technology, which meant they couldn’t service them properly or achieve the hoped-for energy savings. Others had used their existing supplies of high-pressure sodium bulbs in the new lights rather than the smart LED ones. Some customers had failed to even install all the lamps they’d bought. Cameron hadn’t realized how difficult it would be for local governments to change the way they did business, even when they had the best of intentions.

The year before, prompted by all this, Lumiscape’s leadership had decided to pivot from a sales model to a subscription model. Instead of selling the streetlights and leaving the cities to manage them, the company would rent them out for a monthly fee, with installation, maintenance, and monitoring software all included. Lumiscape had also piloted a program in three sites to add Wi-Fi connectivity to the lights, allowing cities to offer internet service in public spaces.

The board had unanimously approved the proposal from Cameron and his COO, Stacy Hamiko, to shift to that strategy. It would position Lumiscape’s technology platform for growth as the smart-cities movement showed signs of taking off. And it would give the company more control over its product and brand and a more stable cash flow, which would translate into higher multiples from would-be investors.

“Higher!” Graham shouted. As Cameron pushed the swing, he felt his phone buzz. Assuming that it was his wife, telling him that her plane from Philly had landed, he looked at the text. It was from Stacy: “Houston’s live again. They want to buy 5,000 streetlights.”

“Houston?!” he said out loud.

“Texas,” Graham yelled from the swing.

Cameron smiled and said, “That’s right, bud.”

Houston had been one of Lumiscape’s first customers, five years earlier. The city manager had originally wanted 6,000 lamps but had cut the order back to 1,000 for budgetary reasons. Neil Hart, Cameron’s head of sales, had kept in touch, hoping that the deal could be resurrected at some stage. And now, according to Stacy’s text, it would be. There was just one problem: Lumiscape didn’t sell streetlights anymore.

They’re Back

Later that night, after Cameron had put Graham to bed, he called Stacy. She explained that she’d been copied on an e-mail to Neil from Houston’s manager, which said that he’d finally gotten approval to buy the additional 5,000 lights. “He mentioned something about surplus in their public works budget and some federal money they needed to spend,” she said.

“It’s just horrible timing,” Cameron said, shaking his head. “Do we know whether Neil has talked to them about subscriptions?”

“Not yet,” she said. “We all assumed the deal was dead. They were on our list but pretty far down it, to be honest.”

“Would they consider it?”

“Neil says not a chance. Even though this new pricing model would probably be better for them—a lower procurement threshold and all—Neil thinks that if it took the city manager this long to get approval for a purchase, there’s no way he’ll go back and say, ‘Never mind. Could we rent instead?’”

Cameron was torn. The mental math was easy: 5,000 lights at $600 apiece meant $3 million. It would be the largest sale to date for Lumiscape, which had taken in $30 million in revenue the year before.

But they had committed to this new subscription strategy, and with good reason. In fact, he and Stacy had used Houston as one example of why selling the streetlights didn’t give customers enough benefits or Lumiscape enough control. It had taken the city several years to install its initial order—and it hadn’t even installed all 1,000 lights. Worse, it apparently hadn’t hired or trained anyone to use the software tools.

“I should tell you that Andrew is already talking about drawing up the purchase agreement,” Stacy said.

Cameron sighed. “Of course he is.” Andrew Lowell, Lumiscape’s CFO, had thought it was a mistake to move exclusively to contracts. He had argued that the engineering team should be held responsible for making a product that customers could use correctly and that Cameron should push the engineers harder before changing the model. Andrew had wanted the company to both sell and rent the streetlights, preserving all sources of revenue and converting customers to the subscription model over time if need be.

Stacy and Cameron had disagreed. Too many customers weren’t using the lights to their full potential. The straight sales model simply wasn’t working. And given the budgeting process in most city halls, it was far easier to go to market with only one type of product. Even with just two options on the table, officials would feel obligated to run both to the ground with all the agencies involved.

“I’ll e-mail Andrew and tell him to hold off,” Stacy said.

Case Study Teaching Notes

Mitchell Weiss teaches the case on which this one is based in his course Public Entrepreneurship.

What drew you to this story?Many people believe that entrepreneurs can’t sell to government. But the global public sector is a huge segment we need to reach to solve big challenges.

How do your students respond to it?Often they underestimate the difficulties of changing customer behavior and of giving choices to organizations with elaborate procurement processes. They also admire the CEO’s determination to both do good and make money.

What lessons does the case offer?Governments don’t always believe companies’ claims about how much money they’ll save by buying new, high-tech products and services. They often mistrust the promises being made and their own ability to execute on the change and realize the saving. So focus on how you will help solve their problem and delight their citizens. Make “saving” secondary, and try to keep both product and procurement simple.

“Good idea. But let’s call a meeting for first thing tomorrow morning and figure out our strategy.”

“You’re going to fly back?” she asked, concerned.

“No, but I don’t think this can wait. Let’s do a video call. We don’t want to lose Houston’s attention.”

The Next Morning

Cameron sat at his parents’ kitchen table and adjusted his laptop screen so that he could see everyone—Andrew, Neil, and Stacy—sitting in the small conference room at their Philadelphia office.

“Sorry I can’t be there in person,” he said. “Is the picture okay?”

Andrew spoke up. “Yes, except for that grim look on your face, Cam. Remember: This is good news.”

“I completely agree,” Neil said. “We’ve got their attention.”

“We’ve got their business, it seems,” Andrew said.

“Not so fast,” Cameron said. “We can’t sell them 5,000 lights—not after all the work we’ve put into the new strategy. Not with all the potential.”

“Moving to subscriptions is a long-term strategy,” Andrew said. “We knew it wasn’t going to be a clean break from the product model. Lots of cities still own their lights, and we aren’t going to buy them back. It will take years before we can convert our existing customers to subscriptions, so there’s no reason we can’t just grandfather Houston in.”

“He has a point,” agreed Neil.

“But don’t you think it will be confusing to talk with potential customers about the subscription product when they know that we just sold Houston 5,000 lights?” Cameron asked.

“I think we can explain the rationale,” Neil replied.

“We’ll look like we don’t have a strategy—like we’re being opportunistic,” Stacy chimed in. “This is a moment to test the new model. If we can convert Houston to subscriptions, we’ve got a great story to tell, not only to other potential customers but to investors.”

“I’ve already floated the idea, and it’s not going to fly,” Neil replied. “He said they have the $3 million to spend this year. How can we leave that money on the table?”

“Exactly,” Andrew said. He clearly had a strong opinion on this, as any good CFO would. But Cameron was reluctant to go back on their strategy decision so soon.

Andrew seemed to have read his mind. “I know I promised to support your decision on the model,” he said. “But I still don’t understand why we can’t do both. If different customers want different things, shouldn’t we meet them where they are?”

“Not if where they are is taking a pass on the best aspects of our product once it’s in the field,” Stacy said. “And failing to take advantage of the upgrades we’re going to continue to offer. We have to consider the brand.”

Cameron sat back and watched the three of them continue to debate. He knew it was on him to make the call, but he was still uncertain.

Lights Out

That night he went to Forest Hill Park on his own. He needed the fresh air, and his parents and wife were happy entertaining Graham. He sat on a bench and looked across the park at a flickering streetlight. He could tell from the way it was going on and off that it was using the wrong kind of bulb. This meant that it was not only creating an unpleasant experience (who wants to walk through a strobe light?) but also pulling more energy from the grid.

He got up to walk home and noticed that someone had spray-painted LIGHTS OUT on the base of one of the broken street lamps his son had noticed before. It was as if the universe was telling him that Lumiscape had to take better control over its product. If cities couldn’t maintain the lights on their own, the company could help them by bundling the software in the subscription, installing the units, fixing broken hardware, upgrading the lights as new features became available, and making the package affordable.

Cameron had felt sure that the subscription model was the way to go. It provided more value to customers, relied less on them and their workers to make the product succeed, and guaranteed more sustainable income for Lumiscape. It was a better model and would help him raise the company’s valuation before they went out for the next round of funding.

But could they really afford to say no to a $3 million bird in the hand? Was Andrew right to suggest a hybrid model? Or could they make this final sale and then shift their strategy once and for all?

Question: Should Lumiscape sell the streetlights to Houston? The Experts Respond

Scott Burns is the CEO and a cofounder of GovDelivery.

Andrew is exhibiting all the right instincts. I agree that Lumiscape has made a terrific decision to move toward a subscription strategy, but it would be a mistake to turn away a paying customer at this point. Success in bringing a new capability to the complex government market requires a mix of strategy and opportunism. If I were executing this deal, I’d secure the order and look for ways to convert Houston to subscription later.

Don’t get me wrong. I’m a big fan of the model that Cameron and Stacy are pursuing, especially since their customers are in the public sector. Subscriptions can be a perpetual revenue source and a way to overcome the high client-acquisition costs in the long sales cycle with governments. My company, GovDelivery, has been selling subscriptions over the past decade; I believe the model aligns interests, motivates companies to deliver value and secure renewals, and drives a higher valuation. We provide a digital platform and add-on solutions for communicating with and improving the experience of citizens. U.S. and European governments use our platform to do everything from encouraging constituents to get flu shots to informing them about pet adoption to urging them to start a business.

It would be a mistake to turn away a paying customer at this point.

Nevertheless, Lumiscape would be foolish to rigidly stick to the strategy. Getting customers to buy into and migrate toward the new model will take time and effort. In this case, the company might sell Houston the 5,000 lights and add a component of the subscription service free so that the city has a proof of concept.

I’ve learned in this business that government will buy the way it will buy, and you don’t want to stand in the way. I regret how GovDelivery handled customers at the outset. From 2000 to 2006 we grew slowly—largely because we were deaf to feedback that clients were more willing to pay for professional services than for subscription-based products. Today our services business is thriving.

Organizations that can invest in Lumiscape lights now should be allowed to do so, especially with a commitment the size of Houston’s. Andrew is absolutely right that the company needs to meet its customers where they are. At the same time, it can focus on refining the subscription model’s value proposition to make it the more compelling choice rather than the only one. A thoughtful, flexible model allows customers to move in increments toward a goal, which is how governments operate.

Risking the Houston deal in order to stick to the long-term strategy prioritizes a simple message over actually growing the business. A sophisticated board will appreciate the benefits of flexibility. And other customers won’t complain if they find out that Houston bought 5,000 streetlights. Lumiscape should be able to distinguish the offerings that each city or county is getting.

Jamming the subscription approach down customers’ throats simply isn’t going to work, now or over the long term. Lumiscape should claim the ground it has worked hard to take and make the deal. As a CEO I admire likes to say, “Never let your strategy get in the way of making money.”

Jack Kutner is the president and CEO of Bigbelly.

Cameron should resist making the deal with Houston—at least in the way Houston wants to. Instead he and his team should work with the city to deliver the best solution for the problem it’s facing. If Lumiscape is going to realize its long-term strategy, it can’t make exceptions.

This case is very loosely based on our experience at Bigbelly, which started out by making solar-compacted waste and recycling bins. Over the past several years we have evolved our model by leveraging leading-edge communications technology and have paired our compacting stations with a suite of software tools that help customers monitor and optimize public waste removal and recycling. We are no longer selling bins; we’re selling a complete waste and recycling solution.

That’s how Cameron needs to think about Lumiscape. It’s not selling streetlights; it’s selling safer parks and streets. And customers aren’t getting what they want and need if the lights are out. We endorse the subscription model at Bigbelly because it builds in all components of the product and service, and the customer ends up with a more meaningful long-term solution. We see that customers learn the technology faster and are better equipped to take advantage of all aspects of the software. The fleet is better maintained, and engagement with the product has increased over time. All this leads to happier, more satisfied customers and a higher-quality product on the street.

Houston’s city manager says that he wants 5,000 lights right now; if the city is sold on the product, which appears to be true, the mechanics of the business model are probably insignificant to him. Neil can persuade him to go with a subscription by explaining the benefits of the new model.

I would urge Cameron not to go back on his strategy shift to make the sale to Houston. A hybrid model is also a bad idea. Customers that think there are two options and don’t have a good understanding of the system will take the path of least resistance, which in the public sector usually means making a straight purchase. But equipment is just a small percentage of the value that Lumiscape provides for its customers.

This exact dilemma has crossed my desk at Bigbelly many times. Instead of simply making the sale, we always lean toward educating the customer about exactly what we’re offering: a more encompassing, turnkey approach to waste and recycling. We push back and test the resolve of the marketplace, and frankly, we have had great success helping people understand that we have their best interests in mind with this change.

Of course, Lumiscape has other considerations. Perhaps it isn’t going to hit its quarterly targets, or its growth rate is lagging. In either case, the company may be unable to decline or delay a $3 million sale. But that doesn’t mean it needs to say yes to selling the lights. It could allow Houston to pay up front for a subscription. The city would get the same services but would pay for them on a different timeline. When we made our shift, we knew that customers would have varying budget considerations, so our payment models take that into account.

Lumiscape needs to take short-term considerations out of this decision and focus on the long view. Change is hard for everyone. But the company shouldn’t alter its model for that reason; it has to provide a long-term solution that will deliver benefits to the city today and in the years to come. Cameron should stick to his guns and help Houston in the process.

A version of this article appeared in the July–August 2016 issue (p.119–124) of Harvard Business Review.

Mitchell Weiss is the MBA Class of 1961 Senior Lecturer of Business Administration at Harvard Business School, where he teaches Public Entrepreneurship. He was Chief of Staff to Mayor Thomas Menino of Boston.